Moody’s changed Pakistan’s economic outlook from ‘negative’ to ‘stable’. In no time, local news channels flashed celebratory headlines and even recalled that the same credit ratings agency had downgraded India’s outlook to negative only last month.
Far from trumping our eastern neighbour, we are not even close to them when it comes to international credit ratings. On a scale of 1-21, we rank 16th, while arch-rival India ranks 9th. We’ll come back to that in a minute, but first let’s understand what these ratings are and why should you care.
Credit rating agencies, such as Standard and Poor’s, Moody’s and Fitch assign credit ratings to countries based on their economic strength. They assess a country’s economic situation, particularly its ability to pay back its foreign debts.
These ratings are taken very seriously by international lenders and can determine the price of a foreign loan. It is much like a personal loan for which a lender wants to know if the borrower has the capacity to pay back. Simply put, the higher the ratings, the easier it is to raise funds from the international market and on lower interest rates. Poor ratings, on the other hand, mean more expensive loans.
In the latest review, Moody’s upgraded Pakistan’s outlook to positive, which simply means that the country’s economy is moving in a positive direction. But it didn’t increase Pakistan’s credit rating, which remains at B3 – the level it has been maintaining since June, 2015.
Moody’s has 21 slabs, starting from AAA, the top rating with minimal credit risk, going all the way down to C, which is usually an indicator that the country is highly unlikely to pay back a loan and might even default.
At B3, we are in the bottom half. This means ours is a speculative economy with high credit risk.
India, on the other hand, stands at Baa2 or seven notches better than Pakistan on Moody’s scale.
To add insult to the injury, in sovereign credit ratings, India’s historic worst is better than Pakistan’s historic best. The worst spot India held was back in 1998 when it came down to as low as Ba2 while Pakistan achieved its best ratings of B1 in 2006 and never rallied above this level in over 30 years.